I wish to start this essay with two points that are the pillars of the article: The country would like to see the real estate industry begin to improve, for the good of the nation; and lenders who hold loans at higher interest rates are in more danger of additional foreclosures from their borrowers than if the borrowers had lower interest rates. These two propositions do not require a fervent belief for most people to get behind them and hope that the theories are correct. Actually, all I wish is that those in charge could understand and get behind these because, as of this time, it doesn't appear that they know, or worse than that, care. Here is why.
It isn't hard to figure out that people who are behind in their mortgage or facing imminent foreclosure get help so that we can stop the foreclosures and the continuing downtrend of the real estate market. The government has taken action to instruct lenders how to help these borrowers with the help of new government programs. Many are taking advantage of this help; some aren't, and additional borrowers are somewhere in between the two. What about the vast majority of Americans who have not fallen behind and are not in danger of foreclosure, but are underwater with their mortgage? Underwater means, of course, their mortgage is higher than the value of their property. These properties are worth less than the mortgage in part because of the foreclosures of those who either speculated, bought beyond their means, or simply decided it was better for them to let the house go than to stay and fight to keep it. Thus, it is fair to say that those who did the right thing, stayed and paid, are being hurt by those who couldn't or didn't want to continue on (not all who have gone through foreclosure could have done anything else and I do not mean to imply that everyone was a scoundrel).
The government recognized the "good guys" and decided to raise a "baby finger", relatively speaking, to help. They were going to take those who had Fannie Mae or Freddie Mac conforming loans and allow them to get a new loan between 80.1% loan to value and 105% loan to value without paying mortgage insurance. If they currently have mortgage insurance they would, unfortunately, have to continue paying for the insurance. For those who do not understand mortgage insurance, it is for loans greater than 80% loan to value. The borrower pays the premium and if they default, the mortgage insurer pays the lender proceeds for the amount over 80%. Before I discuss what has happened, I wish to ask a rhetorical question: what about those whose loan to values are greater than 105% and those who do not have Fannie Mae or Freddie Mac loans because of the type of loan or because they have jumbo loans (large than conforming)?
I would suggest to all of the politicians who believe they did the right thing in their design of the help for those in peril, especially those who are making their payments, sit at my desk and try to explain to the "good guys" why nothing is going to be done to help them. We have been told by this administration that the government is here to help, but not the people who played by the rules. The message now is "you're on your own, good luck!"
The program is underway for those who stayed and paid but it has a very uneven platform. Although the government has said that they will insure loans up to 105% of the value of the property, most of the lenders will not lend over 95%. If they do go over that limit there is a one point (1%) charge to make the loan. Although the government has said that if you have a Fannie Mae or Freddie Mac loan you are eligible for a refinance, if your loan to value doesn't exceed 105%, some banks will not refinance a variable loan and allow you to take a fixed rate loan. Some banks will not make loans under this program at all. On the other hand, all banks who took TARP funds will subordinate their second mortgages to a new first mortgage (this means putting your current second mortgage behind the new first mortgage as it was behind your current mortgage). If the combined value of the first and second exceed 95% the subordination will cost the borrower an additional 1.5% (one and one half points).
This program is for owner occupied properties only, not investment properties. One of the problems resulting from this decision is that many investment properties are going into foreclosure, or are simply having the investor walk away because of a high interest rate mortgage and being well underwater as the property values have dropped dramatically. The lenders are taking back the properties, the investors are taking their "lumps", but the renters are the ones getting the short end of the stick. It may be a rental, but to the renters, it is their "owner occupied". Many have left their homes, many have been evicted and some remain tentatively in what they thought was their home. Is this a problem that will grow? Only time will tell.
On the positive side, several of the big banks have indicated that they will expand the loan to value for this program on some of the loans in their portfolio. One lender has talked about stated income for their borrowers, and another has talked about a waiver on appraisals on their loans. All of this is welcomed as it will benefit those who tried to live up to their responsibility: pay the mortgage. I applaud those institutions who are trying to put more into a program that started with less. My question still goes back to what appears to be a giant error: helping those who defaulted in a far larger and better way than those who didn't. It doesn't square with the American way: work hard, do the right thing and reap the rewards. Is this really the message we want to disregard and replace it with, if you can't make it, look for the government to "bail you out"?
I spend every day trying to help people who have seen their entire financial life turn upside down. It isn't easy to tell people that paying their payments, some with credit cards just to hang on, didn't or hasn't worked out. All conforming loans are not Fannie Mae or Freddie Mac loans, and no jumbo loans are either. Do those on Capitol Hill, who haven't reduced their income, cut their staff, or stopped doing business as usual, have any idea what it means to do the right thing and realize that what they have put into place regarding the mortgages in our country may not have been thought out to the fullest extreme? I think not!
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